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The Biggest Loser?
Russia Confronted by Grim Crude Reality

Russia says it will pump slightly more oil this year than last, though it expects it will miss the 2015 targets set out by its Economy Ministry. But while Moscow seems to be successfully treading water for now, it admits that it could start sinking if prices stay low. Reuters reports:

“If prices remain at a low level for a very long time, then a reduction in production of 5-10 percent is entirely possible, that is if the prices stay at a low level for several years,” [said Russian Deputy Prime Minister Arkady Dvorkovich]. […]

He said the government would not take artificial steps to reduce output, but that a reduction would be the natural consequence of low prices for oil companies’ investment plans.

But the bad news for Moscow doesn’t stop there. As Bloomberg reports, Russia is drastically reducing the number of offshore wells it plans to drill over the next couple of years, choosing to delay the projects in the hopes of a rebound in global prices:

Russia’s state-run energy giants Rosneft OJSC and Gazprom PJSC are delaying some offshore drilling by two to three years because of sanctions and weaker oil prices, according to the country’s Ministry of Natural Resources.

The nation will drill two offshore wells in 2017, down from an original plan for 14, Denis Khramov, deputy minister, said Tuesday at a conference in Russia’s Far East. The delay means 28 wells will be drilled in 2019 instead of 19, he said.

Russia’s medium-term energy prospects are downright dismal. No country in the world has more oil and gas than Russia, and the Kremlin has wielded its exports to great effect in the past, buoying its national budget and using hydrocarbon sales as a geopolitical lever. But over the past 15 months the price of oil has dropped from over $110 per barrel down below $50, and with the market still oversupplied and a flood of new Iranian crude ready to come online once sanctions are officially lifted, Moscow is being backed into a corner. As we wrote this summer, Russia is particularly vulnerable to new competition from Iran, as both countries will be attempting to sell the same variety of heavy, sulfurous crude in Europe.

And for Putin, that has to be the most terrifying aspect of all of this: that it looks like things are going to get worse before they get better. It’s hard to imagine demand spiking high enough to send prices back above $100 per barrel, especially with China’s weakened economy. And on the supply side of things, OPEC is still resisting calls to cut production even while American shale producers are finding ways to keep output up on slimmer margins. This is Russia’s new reality, and it’s not a pretty sight.

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  • Fat_Man

    “It’s hard to imagine demand spiking high enough to send prices back above $100 per barrel”

    All they got to do is start a shooting war in the Persian Gulf.

    • http://holdingmynose.com Holding My Nose

      Might explain why they are getting into Syria in a big way.

      • Fat_Man

        Could be.

  • Joseph Hall

    The age of fossil fuels is over. The age of renewables is here. Some, like Putin, will learn that that hard way…

    • Dale Fayda

      Ha, ha, ha, ha! Really? With more and cheaper oil and natural gas coming out of the ground than ever, with more recoverable oil being discovered every year and with the extraction processes being refined all the time, the age of fossil fuels is over? Mmmmmmm, I’m dubious…

      What we got here, boys, is a “brown energy” revolution, with renewables being relegated to the margins of economic activity, even WITH massive government subsidies. As with any revolution, a certain amount of disruption of the status quo is inevitable and there will be winners and losers, but fossil fuels aren’t going anywhere.

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